Cash calls expected as Europeâs banks face tests

Bankers and analysts expect up to 20 of Europeâs banks to be forced into cash calls as a result of this monthâs stress tests, raising up to â¬30bn ($37.3bn) of fresh equity.

One senior European banker said that even in the event of mild stress the capital shortfall would approach that level. âWe are urging clients to come early to market,â he said. Another investment bank chief said not only the weakest should seek to recapitalise. âThe top three or four banks in Europe should be thinking: âHow do I make myself bullet-proof?ââ

The views reflect a persistent nervousness about the outlook for European banks amid continuing jitters over eurozone sovereign debt.

The news came as it emerged that Axel Weber, head of Germanyâs Bundesbank, told banks at a meeting on Wednesday that they should prepare emergency capital-raising plans in case they fail the stress tests.

Mr Weber told the chief executives of 16 German banks they might need to recapitalise âeither with the help of their owners or with the help of the German bank rescue fundâ, according to one bank executive present at the meeting. âIn effect, this will lead to forced recapitalisations of such banks,â the banker said.

The eight Landesbanken, or state-owned regional wholesale banks are seen as particularly vulnerable, with up to four at risk of failing the tests, according to one German banker. A Bundesbank spokesman declined to comment.

Publication of the Europe-wide tests has been delayed a week to July 23, according to the banker at the Bundesbank meeting.

In recent days, the scope of the testing has expanded from 26 banks to about 100, and measures have been added on the disclosure of sovereign debt holdings.

The tier one capital hurdle to pass the test has been lifted from 4 per cent in last yearâs test to 6 per cent, to make the exercise as credible as the US test last year which appeared to restore market faith in US banks.

About two-thirds of the forecast â¬30bn Europe-wide capital-raising is expected to be focused on the public sector banks, with the remaining â¬10bn spread across private sector institutions in the more troubled eurozone economies.

Bankers singled out the likes of Monte dei Paschi and Banca Popolare di Milano in Italy, Spainâs Banco Popular and Greek, Portuguese and Irish banks as the most likely candidates to be pushed into capital raisings.

But investors worry most about the state of Spainâs public sector savings banks, or cajas. Although they are unlisted they could put Spanish government debt under more pressure if the state bail-out is more extreme than expected. Spain has embarked on a process of forced mergers to bolster the most troubled cajas, and has so far earmarked â¬12bn of state funds in fresh capital for the sector. Bank of Spain regulators believe only about â¬3bn more will be needed to shore up cajas following the stress tests.